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Why must Scotland take a pounding in currency row?

WHEN even George Osborne can come to Scotland and get a fair hearing, we can all agree that the Yes campaign is in trouble.

The Chancellor is possibly the least popular politician in the country right now, yet his suggestions that Scotland could lose the pound sterling, and its bank notes, were not denounced as patronising, anti-Scottish and even illegal last week. You'd think that the pound was his personal property.

That seems to have been the moment that serious cracks finally appeared in the independence coalition. The chairman of Yes Scotland, Dennis Canavan, could take it no more. Patrick Harvie of the Greens has been increasingly frustrated at the small "c" conservatism of the independence campaign, as prosecuted by Alex Salmond. They want a bit of inspiration, a bit of vision, an opportunity to kick sand in the faces of the Unionist bullies with their scare tactics and Westminster committee reports.

So, why not call the Unionist bluff? Who needs the nasty imperialist British pound anyway? Look at Denmark, Norway, Switzerland the Czech Republic. We can go our own way. A number of prominent Nationalists, including the former leader Gordon Wilson, have long advocated a separate Scottish currency. The economist Jim Cuthbert thinks that retaining the pound leaves too much economic power and control with the UK state which anyway is heading for a debt crisis.

Dr Simon Lee, a currency expert from Hull University, agrees and told BBC's Good Morning Scotland programme on Saturday that the UK is on the verge of a collapse of confidence, and that a rescue by the IMF is only a matter of time. "I think sooner or later there will be a run on the pound", he said. "In those circumstances the advantages strategically for Scotland of having its own currency backed by its oil and natural gas would be very very significant indeed."

Dr Lee pointed out that in every year since 1984, the UK has depended on Scottish oil revenues to disguise the dire state of the balance of payments.

What annoys Mr Canavan and co is that the Scottish Government seems to want to be more Unionist than Better Together. Alex Salmond insisting on helping the broken-backed pound by remaining in a currency union, while it is Unionists like the Chancellor who are telling Scots to hop off out of poundland. Scots must be pretty dumb, they say, hitching their fortunes to the London/Cyprus model when the UK has already lost its Triple A credit rating.

So, why does Alex Salmond want to stick with the pound? Well, it's partly psychological. The Nationalists don't believe that the Scots are really up for full economic independence yet, and that they would recoil at the idea of having to change currency every time they go to visit relatives in England.

The other reason is practicality. Companies and banks don't want to have to go to the administrative hassle and cost of trading currencies in order to do business on both sides of the Border. Then there's stability. Business doesn't like uncertainty, and there is clearly a risk of turbulence as the country goes through the process of disengaging from sterling and setting up an independence currency.

Which wouldn't actually be very independent. Countries like Denmark are only nominally autonomous because their currencies are pegged to the euro. Denmark's central bank takes its policy from the European Central Bank but doesn't have any representation on it. The Swiss have been in dire straits because their currency is massively overvalued because of "safe haven" cash pouring into the Swiss franc to escape the euro crisis. The same is true with Norway's krone.

Denmark's central bank had to introduce negative interest rates to stop the inflow of cash – that meant depositors had to pay Danish banks for the privilege of lending them their cash. Since a separate Scottish pound would be a petro-currency, this too might rise in value. During a run on the English pound, cash would flow over the border to Scotland, forcing up the currency and rendering Scottish exports more and more expensive.

There's an argument that an independent Scotland would be better in the euro, provided it could negotiate a good entry rate. But that would mean joining the Exchange Rate Mechanism for two years, and anyway no-one is going to propose joining the single currency in the middle of the eurozone debt crisis.

So, the only "sensible" and "logical" solution is to remain with the pound for the time being – as has been argued by the chairman of Better Together, Alistair Darling, on Newsnight in January. On this, he's right on the money.

The idea that England would refuse to let Scotland keep the pound, returning to George Osborne's independence scare, is of course nonsense. England couldn't do anything to stop an independent Scotland pegging its currency to the pound if it wanted to.

Many countries in Europe, Denmark included, peg their currencies to the euro. The Bank of England anyway doesn't want a separate currency in Scotland undermining the UK balance of payments and encouraging speculative raids on sterling.

Keeping Scotland in the sterling zone could, as the Scottish Socialist Party's Colin Fox has argued, leave a lot of economic power with the UK state. Interest rates would be set by the Bank of England and even if Scotland had representation on the bank's monetary policy committee, it would not have any real say in overall policy.

The UK Treasury, acting through the bank, might ask for control over things like public borrowing levels in Scotland. Possibly taxation and public spending.

But Scotland can always say no.

There is an assumption that Scotland would be the weaker partner in any future currency relationship. That is by no means certain, in fact, as Dr Lee points out, a small country with significant natural resources – hydrocarbon and renewable – would be in a strong negotiating position, in or out of the sterling zone.

Scots need to stop thinking of themselves as weak and feeble supplicants. Looking around Europe right now, the strongest and most stable countries, according to the World Bank, are the Nordic states like Denmark, Norway, Sweden and Finland. These countries combine social protection with dynamic enterprise economies and have solid credit ratings.

Scotland might in the longer term choose to depart from the pound, as Slovakia departed from its currency union with the Czech Republic. But really, there are a lot of better things to worry about in the independence debate than the pound in your pocket.

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